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In the future I will be writing a weekly column for the Danish business daily Børsen. The first column appears in today’s edition of the newspaper (you can read the article in Danish here). International news outlets and newspapers interested a syndication deal on my new weekly column are welcome to contact me (lacsen@gmail.com).

On this occasion I here share the English translation of the article:

We need a mechanism for sovereign debt crisis resolution

Recently nearly all the news flow in the financial media has been about the risk of a Greek sovereign default. But Greece is not the only country, which is currently in serious risk of a default. The same is the case for Ukraine, Venezuela and Puerto Rico. Thus, if we are unlucky, we might get 3-4 sovereign defaults within the next 1-2 months.

It is quite obvious that a possible Greek or Ukrainian sovereign default is something that contributes to the uncertainty surrounding especially the European economy and it is clear that this is contributing to increasing volatility in global financial markets.

The main source of uncertainty in relation to sovereign default is uncertainty about when it happens and what creditors that will be affected.

If we compare a sovereign default with a company or a bank going bankrupt, then it is the case that we in most developed economies in the world have relatively clear rules on how a possible bankruptcy should be handled in legal terms.

It is usually the case that a company in financial trouble under certain conditions can go into receivership, while trying to see if the company can be rescued. And if this rescue attempt fails then there will be quite clear rules about what creditors are first in line when the estate is made up.

Such mechanisms mostly ensure that an orderly and controlled restructuring or liquidation of the company can take place and at the same time ensure the greatest possible transparency about who will bear any losses.

Unfortunately we don’t have similar rules and mechanisms when it comes to sovereign defaults. As a result even a minor risk of a possible sovereign default creates unnecessary volatility in the global financial markets.

This, however, need not be the case and one may wonder why we in the EU hardly have discussed the possibility of organizing a mechanism within the EU, or at least within the euro area, which can ensure a more transparent and proper handling of threatening sovereign defaults.

In 2010, the four economists – including the former chief economist of the World Bank Anne Krueger – put forward a concrete proposal for “A European mechanism for sovereign debt crisis resolution”. The plan for example included a proposal for a special European court to oversee the process of debt negotiations and debt restructuring. Such a court and clear rules on debt restructuring would greatly help to make the handling of the sovereign debt crises much less politicized than it is today.

Unfortunately, the proposal has not received much attention among European decision-maker, and one can only fantasize about how much easier the handling of the Greek debt crisis would have been if we had such rules and mechanism for orderly debt restructuring in place in recent years.

Companies go bankrupt. And so does governments. We therefore urgently need to set up institutions and mechanisms to handle sovereign defaults.

I started writing this post on Monday, but I have had an insanely busy week – mostly because of the continued sharp drop in oil prices and the impact of that on particularly the Russian rouble. But now I will try to finalize the post – it is after on a directly related topic to what I have focused on all week – in fact for most of 2014.

Oil prices have continued the sharp drop and this is leading to serious challenges for monetary policy in oil-exporting countries. Just the latest examples – The Russian central bank has been forced to abandon the managed float of the rouble and effectively the rouble is now (mostly) floating freely and in Nigeria the central bank the central bank has been forced to allow a major devaluation of the country’s currency the naira. In Brazil the central bank is – foolishly – fighting the sell-off in the real by hiking interest rates.

While lower oil prices is a positive supply shock for oil importing countries and as such should be ignored by monetary policy makers the story is very different for oil-exporters such as Norway, Russia, Angola or the Golf States. Here the drop in oil prices is a negative demand shock.

In a country like Norway, which has a floating exchange rate the shock is mostly visible in the exchange rate – at least to the extent Norges Bank allows the Norwegian krone to weaken. This of course is the right policy to pursue for oil-exporters.

However, many oil-exporting countries today have pegged or quasi-pegged exchange rates. This means that a drop in oil prices automatically becomes a monetary tightening. This is for example the case for the Golf States, Venezuela and Angola. In this countries what I have called the petro-monetary transmission mechanism comes into play.

An illustration of the petro-monetary transmission mechanism

When oil prices drop the currency inflows into oil-exporting countries drop – at the moment a lot – and this puts downward pressure on the commodity-currencies. In a country like Norway with a floating exchange rate this does not have a direct monetary consequence (that is not entirely correct if the central bank follows has a inflation target rather than a NGDP target – see here)

However, in a country like Saudi Arabia or Angola – countries with pegged exchange rates – the central bank will effectively will have tighten monetary policy to curb the depreciation pressures on the currency. Hence, lower oil prices will automatically lead to a contraction in the money base in Angola or Saudi Arabia. This in turn will cause a drop in the broad money supply and therefore in nominal spending in the economy, which likely will cause a recession and deflationary pressures.

The authorities can offset this monetary shock with fiscal easing – remember the Sumner critique does not hold in a fixed exchange rate regime – but many oil-exporters do not have proper fiscal buffers to use such policy effectively.

The Export-Price-Norm – good alternative to fiscal policy

Instead I have often – inspired by Jeffrey Frankel – suggested that the commodity exporters should peg their currencies to the price of the commodity the export or to a basket of a foreign currency and the export price. This is what I have termed the Export-Price-Norm (EPN).

For commodity exporters commodity exports is a sizable part of aggregate demand (nominal spending) and therefore one can think of a policy to stabilize export prices via an Export-Price-Norm as a policy to stabilize nominal spending growth in the economy. The graph – which I have often used – below illustrates that.

The graph shows the nominal GDP growth in Russia and the yearly growth rate of oil prices measured in roubles.

There is clearly a fairly high correlation between the two and oil prices measured in roubles leads NGDP growth. Hence, it is therefore reasonable in my view to argue that the Russian central bank could have stabilized NGDP growth by conducting monetary policy in such a way as to stabilize the growth oil prices in roubles.

That would effectively mean that the rouble should weaken when oil prices drop and appreciate when oil prices increase. This is of course exactly what would happen in proper floating exchange rate regime (with NGDP targeting), but it is also what would happen under an Export-Price-Norm.

Hence, obviously the combination of NGDP target and a floating exchange rate regime would do it for commodity exporters. However, an Export-Price-Norm could do the same thing AND it would likely be simpler to implement for a typical Emerging Markets commodity exporter where macroeconomic data often is of a low quality and institutions a weak.

So yes, I certainly think a country like Saudi Arabia could – and should – float its currency and introduce NGDP targeting and thereby significantly increase macroeconomic stability. However, for countries like Angola, Nigeria or Venezueala I believe an EPN regime would be more likely to ensure a good macroeconomic outcome than a free float (with messy monetary policies).

A key reason is that it is not necessarily given that the central bank would respect the rules-of-the-game under a float and it might find it tempting to fool around with FX intervention from time to time. Contrary to this an Export-Price-Norm would remove nearly all discretion in monetary policy. In fact one could imagine a currency board set-up combined with EPN. Under such a regime there would be no monetary discretion at all.

The monetary regime reduces risks, but will not remove all costs of lower commodity prices

Concluding, I strongly believe that an Export-Price-Norm can do a lot to stabilise nominal spending growth – and therefore also to a large extent real GDP growth – but that does not mean that there is no cost to the commodity exporting country when commodity prices drop.

Hence, a EPN set-up would do a lot to stabilize aggregate demand and the economy in general, but it would not change the fact that a drop in oil prices makes oil producers such as Saudi Arabia, Russia and Angola less wealthy. That is the supply side effect of lower oil prices for oil producing countries. Obviously we should expect that to lower consumption – both public and private – as a drop in oil prices effectively is a drop in the what Milton Friedman termed the permanent income. Under a EPN set-up this will happen through an increase inflation due to higher import prices and hence lower real income and lower real consumption.

There is no way to get around this for oil exporters, but at least they can avoid excessive monetary tightening by either allowing currency to float (depreciate) free or by pegging the currency to the export price.

Who will try it out first? Kuwait? Angola or Venezuela? I don’t know, but as oil prices continue to plummet the pressure on governments and central banks in oil exporting countries is rising and for many countries this will necessitate a rethinking of the monetary policy regime to avoid unwarranted monetary tightening.

PS I should really mention a major weakness with EPN. Under an EPN regime monetary conditions will react “correctly” to shocks to the export prices and for countries like Russia or Anglo “normally” this is 90% of all shocks. However, imagine that we see a currency outflow for other reasons – for as in the case of Russia this year (political uncertainty/geopolitics) – then monetary conditions would be tightened automatically in an EPN set-up. This would be unfortunate. That, however, I think would be a fairly small cost compared to the stability EPN otherwise would be expected to oil exporters like Angola or Russia.

PPS I overall think that 80-90% of the drop in the rouble this year is driven by oil prices, while geopolitics only explains 10-20% of the drop in the rouble. See here.

My recent post on the suggestion for a Basic Income Guarantee (BIG) made me think of an idea I have been toying with for some time on how to privatize natural resources. Specifically I came to think of a suggestion for privatization of the Venezuelan energy sector, which I made some time ago in connection with my post on “A modest proposal for post-Chavez monetary reform in Venezuela”.

The reason I came to think of my suggestion, which I made in the commentary section of my blog post, was that I in that commentary suggested something similar to a Basic Income Guarantee – and was what I called a “citizen account”. Unlike the suggestion for a BIG this reform would not necessitate income redistribution as the citizen account would be funded (at least initially) from the privatization of the Venezuelan oil industry.

Here is what I wrote back then:

“… a serious reform of the “oil flows” is needed..However, I did not go into detail about my views on how to actually separate monetary and fiscal policy because I wanted to focus on the monetary part of my proposal.

…First of all I think (the Venezuelan) government should get completely out of the oil business. That would mean privatization of the entire oil sector. The revenue from the privatization(s) should be distributed equally among Venezuelan citizens and put into “citizen accounts”.

Venezuelans should then be able to buy welfare services – such as health care, unemployment insurance and old age pensions and maybe also education. That would mean that citizens could buy welfare services in the free market from private welfare service providers and insurance companies.

That obviously would mean that a lot of the (bad?) services that today is provided by the state would be totally privatized but be funded through “citizen accounts”. There would therefore be an equal distribution of the “oil wealth” among Venezuelan citizen.

Furthermore, the revenue from a tax on oil companies should go directly into the citizen accounts. The tax rate should be modest to provide incentives for investments in the Venezuelan oil industry (it is badly needed as far as I know…) and should be written into the Venezuelan constitution to guard against a politicization of the citizen account system.

This proposal of course would of course have wide ranging consequences, but I believe that it would at the same time liberalize the Venezuelan economy, ensure investments in the oil sector and finally make sure that every Venezuelan citizen will get its “fair share” (whatever that is) of Venezuela’s “oil wealth”.

Matt Zwolinski has tried to argue in favor of a Basic Income Guarantee on libertarian grounds, but as I have earlier argued it is hard to make an libertarian argument in favor of income redistribution. However, the proposal I have outlined above does not essentially necessitate income redistribution. So maybe if Matt rethinks his suggestion for a Basic Income Guarantee as a privatization strategy then he might be able to argue his case without violating libertarian core principles.

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PS my regular readers would probably like to know what I think of today’s FOMC decision. Well, in fact the FOMC did exactly what I personally had expected – very moderate tapering, but also dovish forward guidance that makes future tapering strictly “state dependent”. The Fed will only scale back QE as the economy continues to improve.

Overall, I think this is fine. The US economy is clearly in recovery so the Fed naturally should start gradually to move towards a moderately tighter monetary stance, but not too fast. This is a fairly rule based policy and so far things are going great. By looking at the markets – the Fed did not tighten monetary conditions today – at least not judging from the very positive stock markets reaction. The FX market is telling the same story – Open MOUTH Operations where more important than Open Market Operations today.

Yesterday I wrote a post about how we are inching closer and closer to outright deflation in Europe. However, for other countries the risk of deflation is not the issue. In Argentina and Venezuela outright hyperinflation is becoming more and more likely.

The situation seems particularly insane in Venezuela. This is from Bloomberg (a week ago):

Venezuela’s annual inflation rate rose more than expected to 54.3 percent last month, the fastest pace in as many as 16 years, as shoppers scrambled for scarce goods ahead of Christmas festivities.

October inflation compares with an annualized 49.4 percent the month earlier and the 52 percent median estimate of three analysts surveyed by Bloomberg. Prices rose 5.1 percent in the month, the central bank said today.

Currency controls have crimped imports in a country that gets about 70 percent of its goods from abroad, pushing up the cost of products that make it into the country. Price increases in the capital, Caracas, are running at the fastest pace since 1997, two years before former President Hugo Chavez came to power.

Anybody with the faintest idea about economics knows that you can only get this kind of inflation if the printing is running too fast. So there is only one way to combat inflation – slow the printing press. It is very simple.

But of course this is not the kind of answer Venezuela’s socialist president Nicolas Maduro would like to hear. Instead he has ordered the army to enforce massive cuts in retail prices. Just see this story:

After taking control of several appliance stores last week, Maduro vowed late Sunday to step up inspections of businesses selling shoes, clothes, automobiles and other goods to make sure they aren’t gouging consumers. He also said he’ll impose limits on profits as the government tries to curb inflation running at 54 per cent.

In eastern Caracas, a five-block line of bargain hunters, some waiting since Saturday, snaked from a JVG electronics store hoping for the chance to buy televisions, washing machines and refrigerators at deep discounts.

“We’ve been waiting for this for a long time,” said Sixto Mesa, a government supporter.

Maduro is gambling that by expanding price controls he can regain support he has lost since winning election in April, as inflation soared to a two-decade high and the U.S. dollar shot up on the black market to nine times its official value.

…

“We can’t just close the businesses; the owners have to go to jail,” Maduro said in an impassioned speech Sunday night in which he cited Jewish, Muslim and Christian texts to harangue businessmen he accuses of usury. “We can’t allow our hard currency to be used to rob people through the sale of these goods.”

At the same time Maduro is attacking merchants he calls the “parasitic bourgeoisie,” he has vowed zero tolerance for looting. On Monday, police fired shots in the air to prevent crowds from raiding a toy store in the Caracas suburb of Los Teques, with many businesses in the town shuttering early for fear of violence.

Maduro also took his offensive to the Internet, blocking access to seven websites that track the value of the country’s bolivar currency on the black market. The president over the weekend accused the websites of spreading panic and conspiring against his government.

Venezuelans have been hit by a chronic toilet paper shortage, leading to empty supermarket shelves and long queues to snap up the remaining rolls…When new stocks arrive at supermarkets customers have been rushing in to fill their trollies.

It started with a food shortage and now it is the lack of toilet paper that is the latest economic problem in Venezuela. It is pretty clear that Venezuela’s chronic shortages of essential goods are a result of the combination of excessively easy monetary policy and price controls.

If monetary policy is excessive easy you obviously get high and rising inflation. There is only on way of stopping excessive inflation and that is by slowing the money printing press. Instead the Venezuelan government continues to fight inflation with draconian price controls.

The toilet paper shortage is just the latest round of news that confirms the absolutely failed policies of the socialist Venezuelan government, but as usual the government is unwilling to accept any responsibility for the social ills it is causing. Instead the Venezuelan government blames the media:

Commerce minister Alejandro Fleming said “excessive demand” for the tissue had built up due to a “media campaign that has been generated to disrupt the country.”

He said monthly consumption of toilet paper was normally 125 million rolls, but current demand “leads us to think that 40 million more are required”.

“We will bring in 50 million to show those groups that they won’t make us bow down,” he said.

Anybody who have studied economics for 3 minutes of course knows that Fleming’s explanation of the toilet paper shortage is outrageously wrong, but I guess that the Minister himself is unlikely to have problems getting toilet paper supplies himself as the Venezuelan government is massively corrupted and Ministers certainly do not seem to suffer from the social ills that average Venezuelan have to struggle with.

Radical fiscal and monetary reforms are needed

I have earlier argued that at the core of Venezuela’s economic policies is the fact that the central bank basically has been ordered to finance excessive public spending by letting the printing presses run overtime. There is only one way of stopping the inflation pressures and that is by stopping this monetary funding of public expenditures and then to implement radical monetary reform.

Market Monetarists generally speaking favour nominal GDP targeting or what we also could call nominal demand targeting. For large economies like the US that generally implies targeting the level of NGDP. However, for a commodity exporting economy like Venezuela we can achieve nominal stability by stabilizing the price of the main export good – in the case of Venezuela that is the price of oil measured in Venezuelan bolivar. The reason for this is that aggregate demand in the economy is highly correlated with export revenues and hence with the price of oil.

I have therefore at numerous occasions suggested that commodity exporting countries implement what I have called an Export Price Norm (EPN) and what Jeff Frankel has called a Peg-the Export-Price (PEP) policy.

The idea with EPN is basically that the central bank should peg the country’s currency to the price of the main export good. In the case of Venezuela that obviously would be the price of oil. However, it is not given that an one-to-one relationship between the bolivar and the oil price will ensure nominal stability.

My suggestion is therefore that the bolivar should be pegged to basket of 75% US dollars and 25% oil price. That in my view would view would ensure a considerable degree of nominal stability in Venezuela. So in periods of stable oil prices the Venezuelan bolivar would be more or less “fixed” against the US dollar and that likely would lead to nominal GDP growth in Venezuela that would be slightly higher than in the US (due to catching up effects in Venezuelan productivity), but in periods of rising oil prices the bolivar would strengthen against the dollar, but keep nominal GDP growth fairly stable.

Maybe the toilet paper shortage could convince the new Venezuelan president Maduro to end the Hugo Chavez’s fail policies and implement radical fiscal and monetary reforms – otherwise Venezuela might turn into the smelliest country in the world.

Let’s just say it as it is – I was very positively surprised by the massive response to my post on the economic legacy of Hugo Chavez. However, as somebody who primarily wants to blog about monetary policy it is a bit frustrating that I attract a lot more readers when I write about dead authoritarian presidents rather than about my favourite topic – monetary policy.

So I guess I have to combine the two themes – dead presidents and monetary policy. Therefore this post on my modest proposal for post-Chavez monetary reform in Venezuela.

It is very clear that a key problem in Venezuela is the high level of inflation, which clearly has very significant negative economic and social implications. Furthermore, the high level of inflation combined with insane price controls have led to massive food and energy shortages in Venezuela in recent years.

Obviously the high level of inflation in Venezuela is due to excessive money supply growth and there any monetary reform should have the purpose of bringing money supply growth under control.

A Export Price Norm will bring nominal stability to Venezuela

Market Monetarists generally speaking favour nominal GDP targeting or what we also could call nominal demand targeting. For large economies like the US that generally implies targeting the level of NGDP. However, for a commodity exporting economy like Venezuela we can achieve nominal stability by stabilizing the price of the main export good – in the case of Venezuela that is the price of oil measured in Venezuelan bolivar. The reason for this is that aggregate demand in the economy is highly correlated with export revenues and hence with the price of oil.

I have therefore at numerous occasions suggested that commodity exporting countries implement what I have called an Export Price Norm (EPN) and what Jeff Frankel has called a Peg-the Export-Price (PEP) policy.

The idea with EPN is basically that the central bank should peg the country’s currency to the price of the main export good. In the case of Venezuela that obviously would be the price of oil. However, it is not given that an one-to-one relationship between the bolivar and the oil price will ensure nominal stability.

My suggestion is therefore that the bolivar should be pegged to basket of 75% US dollars and 25% oil price. That in my view would view would ensure a considerable degree of nominal stability in Venezuela. So in periods of stable oil prices the Venezuelan bolivar would be more or less “fixed” against the US dollar and that likely would lead to nominal GDP growth in Venezuela that would be slightly higher than in the US (due to catching up effects in Venezuelan productivity), but in periods of rising oil prices the bolivar would strengthen against the dollar, but keep nominal GDP growth fairly stable.

EPN is preferable to a purely fixed exchange rate regime

My friend Steve Hanke has suggested that Venezuela implements a currency board against the dollar and permanently peg the Venezuelan bolivar to the dollar. However, that in my view could have a rather destabilizing impact on the economy.

Imagine a situation where oil prices increase by 30% in a year (that is not usual given what we have seen over the past decade). In that scenario the appreciation pressures on the bolivar would be significant, but as the central bank was pegging the exchange rate money supply growth would increase significantly to curb the strengthening of the currency. That would undoubtedly be inflationary and could potentially lead to a bubble tendencies and an increase the risk of a boom-bust in the economy.

If on the other hand the bolivar had been pegged to 75-25% basket of US dollars and oil then an 30% increase in the oil prices would lead to an appreciation of the bolivar by 7.5% (25% of 30%). That would counteract the inflationary tendencies from the rise in oil prices. Similar in the case of a sharp drop in oil prices then the bolivar would “automatically” weaken as if the bolivar was freely floating and that would offset the negative demand effects of falling oil prices – contrary to what happened in Venezuela in 2008-9 where the authorities tried to keep the bolivar overly strong given the sharp drop in oil prices. This in my view is one of the main cause for the slump in Venezuelan economic activity in 2008-9. That would have been avoided had the Venezuelan central bank operated EPN style monetary regime.

I should stress that I have not done detailed work on what would be the “optimal” mixed between the US dollar and the oil price in a potential bolivar basket. However, that is not the important thing with my proposal. The important thing is that such a policy would provide the Venezuelan economy with an stable nominal anchor while at the time reduce the risk of boom-bust in the Venezuelan economy – contrary to what have been the case in the Chavez years.

Time to get rid of currency and price controls

The massively unsustainable fiscal and monetary policy since 1999 have “forced” the Venezuelan government and central bank to implement draconian measures to control prices and the exchange rate. The currency controls have lead to a large black market for foreign currency in Venezuela and at the same time the price controls have led to massive energy and food shortages in Venezuela.

Obviously one cannot fight inflation and currency depreciation with interventionist policies. Therefore, this policies will have to be abandoned sooner rather than later as the cost of these policies are massive. Furthermore, it is obvious that the arguments for these policies will disappear once monetary policy ensures nominal stability.

End monetary funding of public finances

A key reason for the high level of inflation in Venezuela since 1999 undoubtedly has to be explained by the fact that there is considerable monetary financing of public finances in Venezuela. To end high-inflation it is therefore necessary to stop the central bank funding of fiscal policy. That obviously requires to bring the fiscal house in order. I will not touch a lot more on that issue here, but obviously there is a lot of work to be undertaken here. A place to start would obviously be to initiate a large scale (re)privatization program.

A modest proposal for monetary reform

We can therefore sum up my proposal for monetary reform in Venezuela in the following four points:

1) Introduce an Export Price Norm – peg the Bolivar to a basket of 75% US dollars and 25% oil prices

I doubt that this post will be popular as my latest post on Venezuela, but I think that this post is significantly more important for the future well-being of the Venezuelan economy and a post-Chavez regime should move as fast as possible to implement monetary reform because without monetary reform the Venezuelan economy is unlikely to fully recover from its present crisis.

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Jeffrey Frankel has made a similar proposal for the Gulf States. Have a look at Jeff’s proposal here.

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Update: Steve Hanke has a comment on his suggestion for full dollarization in Venezuela. Even though I prefer my own EPN proposal I must say that Steve’s idea has a lot of appeal given the obvious weakness of public institutions in Venezuela and a very long history (pre-dating Chavez) of monetary mismanagement.

Today (March 5th) – on the 60 year anniversary of Stalin’s death – Venezuelan president Hugo Chavez passed away.

I think Chavez’s economic legacy can be pretty well-illustrated by two graphs comparing Venezuela’s economic performance from 1999 when Chavez became president with three ‘neo-liberal’ Latin American countries – Chile, Peru and Colombia.

We start out with the real GDP level (Index 1999 = 100)

And next the price level (GDP deflator, Index 1999 = 100)

I leave it to my readers to judge whether Hugo Chavez’s death is a positive or a negative shock to Venezuela’s economy.

PS I am not claiming that Venezuelan economic statistics has not been manipulated. My source is IMF.

In my previous post I discussed how price controls likely have created a wedge between inflation measured by CPI and by the GDP deflator in Malaysia. That made me think – can we find other examples of this in the world? And sure thing the story of Argentina’s inflation over the last decade seem to be more or less the same thing.

The graph below shows Argentine inflation measured by CPI and the GDP deflator since 2002. The difference is very easy to spot.

It is very clear that until 2005 the two measures of inflation tracks each other quite closely, but from 2005 a difference opens up. So what happened in 2005? Well, the story is exactly as in Malaysia – monetary policy is inflationary and the government tries to curb inflation not by printing less money, but by introducing price controls.

Argentine President Nestor Kirchner accused supermarkets of price fixing and said he would increase controls to slow a surge in inflation.

Kirchner, in a televised speech at the presidential palace, said agreements between supermarkets such as Coto CISA SA and Hipermercados Jumbo SA, a unit of Chilean retailer Cencosud SA, to increase prices would lead to 12 percent inflation next year. In the 12 months through October Argentina’s consumer prices rose 10.7 percent, the fastest rate of increase in 29 months.

“We will fight to defend consumers’ pockets,” Kirchner said, without specifying how he would slow price increases.

The accusation underscores the government’s concern over quickening inflation, which may increase poverty in a country where almost 50 percent of the population cannot afford to cover their food and other basic needs, said economist Rafael Ber of Argentine Research brokers in Buenos Aires.

Rising prices may also hurt the ability of Argentine producers to compete with foreign goods, Ber said.

Kirchner has already attacked private companies for increasing prices. In April, he called on consumers to boycott The Royal Dutch Shell Group after the energy company increased prices.

So there you go – price controls in response to inflation. That is never good news and the result has been the same in Argentina as in Malaysia (actually it is much worse) – shortages (See also my previous discussion of food shortages in Venezuela and Argentina here).

Price controls always have the same impact – shortages – and if you think Malaysia and Argentina are the only countries in the world to make this kind of policy mistakes think again. Here is from the US, where a Republican governor these days is experimenting with price controls and the result is the same as in Argentina and Malaysia – shortages!

PS it should be noted that the Argentine inflation data very likely is manipulated so there is more to it than just price controls – we also has a case of the books being cooked. See more on that here.

Today I have been in Oslo, Norway for client meetings. The topic on the agenda is Central and Eastern Europe and particularly the investment climate in South Eastern Europe. That gives me reason to discuss a favourite topic of mine – “regime uncertainty – as defined by Robert Higgs – and why the present lacklustre recovery in the US economy is unlikely in anyway to be related to such regime uncertainty.

As an economist who have been working professionally with Emerging Markets for more than I decade I know about regime uncertainty. In fact I think you to some extent can define an Emerging Markets economy as an economy where regime uncertainty is a dominant factor in the economy.

Robert Higgs basically defines regime uncertainty as a lack of protection of property right and a lack of respect for the rule of law. This is a serious problem in many Emerging Markets – including in the South Eastern European countries, which has been the focus of my meetings today.

My favourite source for a numerical measure of these uncertainties is the conservative Heritage Foundation’s Economic Freedom Index. We can use the sub-index for “Rule of Law” in the Economic Freedom Index as a proxy for “regime uncertainty”.

Let’s as an example look at two random South Eastern European countries – Albania and Bulgaria. Here is what Heritage Foundation has to say about the “Rule of Law” in Albania:

“Albania still lacks a clear property rights system, particularly for land tenure. Security of land rights remains a problem in coastal areas where there is potential for tourism development. Although significant reforms of the legal system are underway, the courts are subject to political pressures and corruption. Protection of intellectual property rights is weak. Albania is a major transit country for human trafficking and illegal arms and narcotics.”

“Respect for constitutional provisions securing property rights and providing for an independent judiciary is somewhat lax. The judicial system is unable to enforce property rights effectively, and inconsistent application of the rule of law discourages private investments. Despite legal restrictions, government corruption and organized crime present a threat to Bulgaria’s border security.”

In my view the Heritage Foundation’s description of the lack of respect for the rule of law and property rights in Albania and Bulgaria is pretty close to the reality in these two countries. So there is no doubt that there in both countries are a considerably degree of regime uncertainty.

This heightened level of regime uncertainty very likely is having a considerably negative impact on both foreign direct investments and domestic investments in both countries and therefore on the long-term growth prospects of these countries. Who would for example invest in a sea sight hotel in Albania it might be stolen from you tomorrow or in a year – maybe even with the tacit support of government officials?

Bulgaria and Albania are just two examples of serious regime uncertainty, but many (most!) developing economies and Emerging Markets around the world have serious problems with regime uncertainty. Therefore, as an Emerging Markets economist I find this issue highly relevant. However, I should also stress that I believe regime uncertainty is a supply side phenomenon. Regime uncertainty hampers investment, which reduces the productive capacity of the economy and hence reduces productivity growth, but as aggregate demand in the economy is determined by monetary factors regime uncertainty – in Higgs’ sense – cannot be a demand phenomenon. Yes, regime uncertainty can impact the composition of demand but not aggregate demand in the economy.

The best way to illustrate that regime uncertainty is a supply side phenomenon is to look at three contemporary examples – Venezuela, Argentina and Iran. The regimes in all three countries obviously have very little respect for the rule of law and there is weak protection of property rights in all three countries. However, all three countries also are struggling with high – and to some extent even escalating – inflation. If regime uncertainty were a demand phenomenon then inflation would be low and falling in these countries. It is not.

When I listen to the present political-economic debate in the US many conservative and libertarians economists and commentators (who I would normally tend to agree with) point to regime uncertainty as a key reason for the weak US recovery. Frankly speaking while I acknowledge that there might have been a rise in regime uncertainty in the US – in frank I am certain there has been – I doubt that it in any meaningful way can be said to have had a notable and sizable negative impact on US investment activity. Furthermore, the US economy is showing all the signs of having a demand side problem rather than a supply side problem. If the US economy had undergone a serious negative supply shock then US inflation would has been increasing – as is the case in for example Iran. US inflation is not increasing – rather since 2008 US PCE core inflation has averaged a little more than 1% a year on average.

Furthermore, even though uncertainty about the outlook for US tax rules have increased and Obamacare likely have had a negative impact on the overall investor sentiment in the US it would be rather foolish to claim that property rights are not well-protected in the US. This is what Heritage Foundation has to say about the rule of law in the US:

“Property rights are guaranteed, and the judiciary functions independently and predictably. Serious constitutional questions related to government-mandated health insurance have been under consideration in the courts. Corruption is a growing concern as the cronyism and economic rent-seeking associated with the growth of government have undermined institutional integrity.”

Even though Heritage Foundation highlights some negative factors the US can hardly be said to be Bulgaria and Albania. In fact the US is in the very top in the world when it comes to protection of property rights and the respect for the rule of law. I therefore doubt that US multinational companies like Apple of Coca Cola are seriously concerned about the rule of law in the US when you take into account that these companies have been seeing there strong sales and income growth in Emerging Markets like China, India, Russia and Brazil.

In fact I could understand if these US companies would be concerned about the present regime uncertainty in China in connection with the ongoing leadership change in the Chinese communist party, the crackdown on freedom of speech in Russia under president Putin’s leadership, the scaling back of economic reforms in India or the ad hoc nature of changes to taxation of inward investments into Brazil.

So while I certainly remain concerned about the regulatory developments in the US over the past decade (yes it started well before Obama became president) I doubt that the present lacklustre recovery can be blamed on these problems. The reason for the lacklustre recovery is rather monetary uncertainty rather than regime uncertainty. Since 2008 US monetary policy has moved away from a ruled based regime to a highly discretionary and to some extent highly unpredictable regime. That is the problem.

So yes, US companies are likely worried about regime uncertainty, but it likely worries about regime uncertainty in China or Brazil rather than regime uncertainty in the US.

A simple way to illustrate this is to look at the Heritage Foundation’s score for protection of property rights in some of the countries mentioned in this blog post. Heritage Foundation considers a score between 80 and 100 to be a “free country”. It is very clear from the graph that investors should worry (a lot) about the protection of property rights in Albania, Bulgaria or in the so-called BRIC economies, but I doubt that many international investors have sleepless nights over the whether or not property right will be well-protected in the US.

Finally I am as worried about the rise of interventionist economic policies in the US and in Europe as anybody else, but we should be right for the right reasons. Interventionist economic policies surely reduce the growth prospects in the US and Europe, but that is supply side concerns for the longer run and we can’t blame these failed policies for the weak recovery.

I have the best wife in the world and she has been extremely understanding about my odd idea to start blogging, but there is one thing she is not too happy about and that is that I tend to leave printed copies of working papers scatted around our house. I must admit that I hate reading working papers on our iPad. I want the paper version, but I also read quite a few working papers and print out even more papers. So that creates quite a paper trail in our house…

But some of the working papers also end up in my bag. The content of my bag today might inspire some of my readers:

These two papers I printed out when I was writting my recent post on Czech monetary policy. It is obvious that the Czech central bank is struggling with how to ease monetary policy when interest rates are close to zero. We can only hope that the Czech central bankers read papers like this – then they would be in no doubt how to get out of the deflationary trap. Frankly speaking I didn’t read the papers this week as I have read both papers a number of times before, but I still think that both papers are extremely important and I would hope central bankers around the world would study Svensson’s and McCallum’s work.

My regular readers will know that I believe that the key problem in both the US and the European economies is overly tight monetary policy. However, that does not change the fact that I am extremely fascinated by Robert Higgs’ concept “Regime Uncertainty”. Higgs’ idea is that uncertainty about the regulatory framework in the economy will impact investment activity and therefore reduce growth. While I think that we primarily have a demand problem in the US and Europe I also think that regime uncertainty is a highly relevant concept. Unlike for example Steve Horwitz I don’t think that regime uncertainty can explain the slow recovery in the US economy. As I see it regime uncertainty as defined by Higgs is a supply side phenomena. Therefore, we should expect a high level of regime uncertainty to lower real GDP growth AND increase inflation. That is certainly not what we have in the US or in the euro zone today. However, there are certainly countries in the world where I would say regime uncertainty play a dominant role in the present economic situation and where tight monetary policy is not the key story. My two favourite examples of this are South Africa and Hungary. I would also point to regime uncertainty as being extremely important in countries like Venezuela and Argentina – and obviously in Iran. The last three countries are also very clear examples of a supply side collapse combined with extremely easy monetary policy.

Furthermore, we should remember that tight monetary policy in itself can lead to regime uncertainty. Just think about Greece. Extremely tight monetary conditions have lead to a economic collapse that have given rise to populist and extremist political forces and the outlook for economic policy in Greece is extremely uncertain. Or remember the 1930s where tight monetary conditions led to increased protectionism and generally interventionist policies around the world – for example the horrible National Industrial Recovery Act (NIRA) in the US.

I have read Higg’s paper before, but hope to re-read it in the coming week (when I will be traveling a lot) as I plan to write something about the economic situation in Hungary from the perspective of regime uncertain. I have written a bit about that topic before.

I have written about this paper before and I have now come around to read the paper. It is excellent and gives a very good overview of historical hyperinflations. There is a strong connection to Higgs’ concept of regime uncertainty. It is probably not a coincidence that the countries in the world where inflation is getting out of control are also countries with extreme regime uncertainty – again just think about Argentina, Venezuela and Iran.

This blog is about monetary policy issues and that is what I spend my time writing about, but I do certainly have other interests. There is no doubt that I am an economic imperialist and I do think that economics can explain most social phenomena – including religion. My recent trip to Provo, Utah inspired me to think about religion again or more specifically I got intrigued how the Church of Jesus Chris Latter day Saints (LDS) – the Mormons – has become so extremely successful. When I say successful I mean how the LDS have grown from being a couple of hundreds members back in the 1840s to having millions of practicing members today – including potentially the next US president. My hypothesis is that religion can be an extremely efficient mechanism by which to solve collective goods problems. In Anderson’s and Tollison’s paper they have a similar discussion.

If religion is an mechanism to solve collective goods problems then the most successful religions – at least those which compete in an unregulated and competitive market for religions – will be those religions that solve these collective goods problems in the most efficient way. My rather uneducated view is that the LDS has been so successful because it has been able to solve collective goods problems in a relatively efficient way. Just think about when the Mormons came to Utah in the late 1840s. At that time there was effectively no government in Utah – it was essentially an anarchic society. Government is an mechanism to solve collective goods problems, but with no government you have to solve these problems in another way. Religion provides such mechanism and I believe that this is what the LDS did when the pioneers arrived in Utah.

So if I was going to write a book about LDS from an economic perspective I think I would have to call it “LDS – the efficient religion”. But hey I am not going to do that because I don’t really know much about religion and especially not about Mormonism. Maybe it is good that we are in the midst of the Great Recession – otherwise I might write about the economics and religion or why I prefer to drive with taxi drivers who don’t wear seat belts.